Here are three things to know about payday loans. The interest rates are high. The penalties are high. The need to take out another loan to pay off the first one is great.
Why do borrowers take them out? The answer is simple. They need the money. The demand is for money is the reason for the payday loan industry. When states try to control them, they turn to the Internet and to federal Indian Tribes that have different rules governing them.
The federal Consumer Financial Protection Bureau (CFPB) is proposing new rules to help borrowers. It wants to put a limit on interest rates. It wants to lower the number of loans a borrower can take out each year. The most important change is to make lenders look at the borrower’s ability to repay the loan.
Do borrowers want new rules? They certainly want lower interest rates and fewer penalties. They may not want limits on how many times they can borrow each year.
Advocates regard payday lenders as leeches who take advantage of the poor. Payday lenders say they meet a need and, without them, borrowers would have no place to go.
Policy experts ask if there is another alternative? The commercial and savings banks do not seem interested in the business of lower-income borrowers. It costs too much for them to service these customers.
The government does not operate any lending program for this population.
Borrowing money is as American as apple pie.
The system is built on the right to make a profit. It is likely to aid the few at the expense of the many. The CFPB wants to reform a business that profits from the poor. Such reform is very hard to do without making it at least a little harder for lower-income people to get short-term loans.
Source: The New York Times March 26, 2015